A few hours after being appointed, France's new Prime Minister Francois Bayrou faced his first setback: the country's credit rating was downgraded by credit rating agency Moody's.

The agency announced on Saturday that it was rating cut of France to "Aa3" from "Aa2" with a stable outlook, citing concerns about "political fragmentation."

Paris is in the midst of political turmoil, with disagreements over tax and spending plans toppling the last government after just three months in power.

Moody's said the divisions would harm attempts to fix France's budget deficit and debt, adding that the country's public finances would be "substantially weakened in the coming years."

"This is because political fragmentation is more likely to prevent significant fiscal consolidation ... Looking ahead, there is now a very low probability that the next government will sustainably reduce the size of the deficits fiscal beyond next year," the rating agency said in a statement. .

Traders reacted negatively to the downgrade, with France CAC 40 down 0.7% Monday morning. Meanwhile, the yield on the country's benchmark 10-year bond was trading at 3.03%, just slightly below that of its Greek counterpart, at 3.09%.

Late last month, the difference in yields on French and Greek 10-year government bonds fell to zero as investors demanded the same interest in holding French debt as that of historically troubled Greece — indicating the extent of concern about the former's political turmoil.

Uncertainty has gripped France since the summer when indecisive parliamentary elections saw both left and right political blocs perform well. Despite this, French President Emmanuel Macron installed conservative Michel Barnier as Prime Minister, causing consternation among opposition parties on both sides of the political spectrum.

Barnier's government proved to be short-lived, lasting only three months before it was it fell in a vote of no confidence in early December after French lawmakers rejected his government's 2025 budget plans that included billions of euros in tax increases and cuts in public spending.

Under pressure to appoint a quick successor, Macron named his centrist ally Bayrou as prime minister on Friday.

Bayrou, 73, is the leader of the Democratic Movement party and a veteran politician from the center who has advocated for France to tackle its growing debt pile — which stood at around 112% of gross domestic product in -2024 — and its excessive budget deficit, expected to hit 6.1% this year, even before they were problematic.

Analysts said Bayrou's long standing in French politics could help when it comes to renewed attempts to get lawmakers on the far left and far right to agree on a 2025 budget.

Meanwhile, the deputies in the National Assembly are expected to agree to pass the 2024 budget for 2025 in order to prevent a shutdown on January 1st.

However, there is no clarity on an eventual agreement on next year's budget will be reached, which makes the position of the new government as fragile as the last.

"The path to securing a 2025 budget is not clear," Raphael Brun-Aguerre, an economist at JPMorgan, said in a note Friday.

"Incoming demands from opposition parties may be fiscally costly and the degree of fiscal consolidation may be limited next year as a result," he said in emailed comments.

There is speculation that Bayrou will look to parties within the left-wing New Popular Front alliance to prevent another no-confidence motion from being tabled, and to pave the way for an agreement on the 2025 budget.

"If Bayrou can 'buy' the 66 Socialist deputies (far from certain), he would share the left-wing alliance of the New Popular Front that voted with the National Rally party of Marine Le Pen to overthrow Barnier the -last week," Mujtaba Rahman, Managing Director of Europe at Eurasia Group, said in an emailed note.

"With the support of around 20 independents he can hope to avoid a motion of no confidence or even pass a budget as normal once revised tax and spending plans for 2025 are presented in the new year. Any threat of another censure vote in the Assembly by the combined forces of the extreme right and the hard left would have been neutralized or greatly reduced," said Rahman.

Eurasia Group said its base case scenario is that Bayrou has a narrow window of opportunity — a 60% probability — to enact a 2025 budget in the first few months of 2025. This would be based on the Barnier budget but amended to appeal to the moderates. left, the consultancy said.